China-U.S. Trade Issues

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1 Wayne M. Morrison Specialist in Asian Trade and Finance September 17, 2009 Congressional Research Service RL33536 CRS Report for Congress Prepared for Members and Committees of Congress

2 Summary U.S.-China economic ties have expanded substantially over the past three decades. Total U.S.- China trade rose from $5 billion in 1980 to $409 billion in In 2008, China was the second largest U.S. trading partner, its third largest export market, and its biggest source of imports. In 2008, about 12% of total U.S. global trade was with China, although trade flows have declined in 2009 as a result of the global economic slowdown. According to U.S. data, U.S. firms have invested around $46 billion in China through 2008, some of which is aimed at the Chinese domestic market, while other investment has gone into export-oriented manufacturing facilities. With a huge population, a rapidly expanding economy, and over $2 trillion in foreign exchange reserves, China is a potentially huge market for U.S. exporters and investors. However, bilateral economic relations have become strained over a number of issues, including large and growing U.S. trade deficits with China ($266 billion in 2008), China s failure to fully implement its World Trade Organization (WTO) commitments (especially in regards to protection of intellectual property rights), its refusal to adopt a floating currency system, its use of industrial policies (such as subsidies) and other practices deemed unfair and/or harmful to various U.S. economic sectors, and its failure in some cases to ensure that its exported products meet U.S. health and safety standards. Further complicating the bilateral economic relationship is China s large holdings of U.S. debt, such as Treasury securities. In September 2008, China overtook Japan to become the largest foreign holder of such securities; these totaled $801 billion as of July Some analysts welcome China s purchases of U.S. debt securities, which help fund U.S. budget deficits, while others have expressed concerns that growing Chinese holdings of U.S. debt may increase its leverage over the United States. The current global economic crisis could further challenge China-U.S. economic ties. Many analysts have expressed concern that the Chinese government, in an effort to help its sagging export industries, is implementing new trade barriers and boosting industrial subsidies, which, many charge, could harm some U.S. firms and workers. U.S. policymakers have urged China to lessen its reliance on exports for its economic growth and instead implement policies to promote domestic consumption. Several Members of Congress have urged the Obama Administration to take a more assertive approach in dealing with Chinese economic practices, including increasing the use of U.S trade laws (such as antidumping, countervailing, and safeguard provisions) to respond to unfair trade practices or to assist U.S. workers injured by imports from China; bringing more WTO dispute resolution cases against China (where the United States has prevailed in a number of cases); and continuing to pressure China to appreciate its currency and make other economic reforms. Others have warned against using protectionist measures to block imports of Chinese goods and have advocated using high-level bilateral talks, such as the U.S.-China Strategic and Economic Dialogue, to resolve major trade disputes. On September 11, 2009, President Obama announced that he would impose additional tariffs on U.S. imports of certain car and light truck tires from China, due to market disruption caused by such imports. China responded by filing a WTO case against the United States and stating that it had initiated anti-dumping and anti-subsidy cases against U.S. auto parts and poultry. Congressional Research Service

3 Contents U.S. Trade with China...1 Major U.S. Exports to China...4 Major U.S. Imports from China...6 Investment Ties...8 China s Holdings of U.S. Securities...8 U.S. Holdings of Chinese Securities...10 Bilateral FDI Flows...10 Major U.S.-China Trade Issues China and the World Trade Organization WTO Implementation Issues...12 Pending U.S. Cases Against China...14 Resolved Cases or a WTO Panel Ruling Has Issued a Ruling...14 Chinese WTO Cases Against the United States...15 Violations of U.S. Intellectual Property Rights...16 The U.S. WTO Cases Against China on IPR...18 China and Safeguards...19 The Chinese Tire Case...19 China s Currency Policy...21 Health and Safety Concerns Over Certain Imports from China...22 Recent Issues...23 Applying U.S. Countervailing Laws to China...24 Textile and Apparel Products...25 The U.S.-China Strategic and Economic Dialogue...25 U.S.-China Trade Legislation in the 111 th Congress...26 Figures Figure 1. U.S. Trade With China: Figure 2. Top Five U.S. Export Markets: Tables Table 1. U.S. Merchandise Trade with China: and Projections for 2009*...2 Table 2. U.S. Merchandise Trade Balances with Major Trading Partners: Table 3. Major U.S. Exports to China: Table 4. U.S. Merchandise Exports to Major Trading Partners in 2001 and Table 5. Major U.S. Imports From China: Table 6.Major Foreign Suppliers of U.S. Computer Equipment Imports: Table 7. China s Holdings of U.S. Securities: June 2002-June Table 8. China s Holdings of U.S. Treasury Securities: and July Table 9. China s Cumulative FDI in the United States and U.S. FDI in China: Congressional Research Service

4 Table 10. Top Five Suppliers of U.S. Imports of Certain Vehicle Tires: 2005-July Contacts Author Contact Information...28 Congressional Research Service

5 E conomic and trade reforms (begun in 1979) have helped transform China into one of the world s fastest growing economies. China s economic growth and trade liberalization, including comprehensive trade commitments made upon entering the World Trade Organization (WTO) in 2001, have led to a sharp expansion in U.S.-China commercial ties. Yet, bilateral trade relations have grown increasingly strained in recent years over a number of issues, including a large and growing U.S. trade deficit with China, the refusal by China to adopt a floating currency, its failure to fully implement many of its WTO obligations, especially in regards to protection of intellectual property rights (IPR), and problems relating to the health and safety of Chinese-made products. Several Members of Congress have called on the Obama Administration to take a tougher stance against China to induce it to eliminate economic policies deemed harmful to U.S. economic interests and/or are inconsistent with WTO rules. This report provides an overview of U.S.-China economic relations, surveys major trade disputes, and lists bills introduced in the 111 th Congress that would impact bilateral commercial ties. U.S. Trade with China 1 U.S.-China trade rose rapidly after the two nations re-established diplomatic relations (in January 1979), signed a bilateral trade agreement (July 1979), and provided mutual most-favored-nation (MFN) treatment beginning in In 1978 (before China s reforms began), total U.S.-China trade (exports plus imports) was $1 billion; China ranked as the 32 nd largest export market and the 57 th largest source of U.S. imports. In 2008, bilateral trade hit $409 billion, making China the second largest U.S. trading partner (after Canada), the third largest U.S. export market, and the largest source of U.S. imports. In recent years, China has been one of the fastest growing U.S. export markets and the importance of this market is expected to grow even further as living standards continue to improve and a sizable Chinese middle class emerges. The U.S. trade deficit with China has surged in recent years as imports from China have grown much faster than U.S. exports to China (although it grew by only $10 billion in 2008). That deficit rose from $34 billion in 1995 to $266 billion in 2008 (see Table 1 and Figure 1); it was significantly larger than that with any other U.S. trading partner and several trading groups. For example, it was nearly equal to the combined U.S. deficits with the countries that make up the Organization of the Petroleum Export Countries (OPEC) and the 27 countries that make up the European Union (EU27), and it was more than three times larger than the trade deficit with Japan (see Table 2). Some analysts view the huge U.S. trade deficit with China as an indicator that China s economic and trade policies are restrictive or unfair, while others contend that the growing deficit reflects a shift in export-oriented production from other countries (largely in Asia) to China. 1 For more information on China s economy, see CRS Report RL33534, China s Economic Conditions, by Wayne M. Morrison. For general information on U.S.-China ties, see CRS Report RL33877, China-U.S. Relations in the 110th Congress: Issues and Implications for U.S. Policy, by Kerry Dumbaugh. 2 The United States suspended China s MFN status in 1951, which cut off most bilateral trade. China s MFN status was conditionally restored in 1980 under the provisions set forth under Title IV of the 1974 Trade Act, as amended (including the Jackson-Vanik freedom of emigration provisions). China s MFN status (which was re-designated under U.S. trade law as normal trade relations status, or NTR) was renewed on an annual basis through January 2002, when permanent NTR was extended to China (after it joined the WTO). Congressional Research Service 1

6 The global financial crisis has had a significant impact on U.S.-China trade flows. During the first half of 2009, U.S. exports to, and imports from, China were down 17.2% and 13.4%, respectively over the same period in At this rate, the U.S. trade deficit with China could decline to $233 billion in 2009, a $33 billion drop from last year s deficit. Table 1. U.S. Merchandise Trade with China: and Projections for 2009* ($ in billions) Year U.S. Exports U.S. Imports U.S. Trade Balance projection* Source: USITC DataWeb. * 2009 projections based on actual data for January-June Table 2. U.S. Merchandise Trade Balances with Major Trading Partners: 2008 ($ in billions) Country or Trading Group U.S. Trade Balance World China Organization of Petroleum Exporting Countries (OPEC) European Union (EU27) Canada Japan Mexico Association of Southeast Asian Nations (ASEAN) Source: USITC DataWeb. Congressional Research Service 2

7 400 Figure 1. U.S. Trade With China: $billions Exports Trade Balance Imports Source: USITC DataWeb. Figure 2. Top Five U.S. Export Markets: 2008 $billions $billions Canada Mexico China Japan Germany U.S. Exports Source: USITC DataWeb. Congressional Research Service 3

8 Major U.S. Exports to China U.S. merchandise exports to China in 2008 were $71.5 billion, up 9.5% (compared to an 18.1% rise in 2007) over the previous year. 3 In 2007, China overtook Japan to become the third largest U.S. export market and was third in 2008 (see Figure 2). U.S. exports to China in 2008 accounted for 5.5% of total U.S. exports (compared to 3.9% in 2003). The top five U.S. exports to China in 2008 were waste and scrap, semiconductors and electronic components, oilseeds and grain, aircraft and parts, and resins and synthetic rubber and fibers (see Table 3). 4 China is a significant market for U.S. agricultural products. It was the fourth largest destination for U.S. agricultural exports in 2008 at $12.1 billion, up 46.5% over the previous year. Major U.S. agricultural exports to China include soybeans, meat products, and cotton. 5 Over the past few years, China has been one of the fastest growing U.S. export markets, as can be seen in Table 4. U.S. exports to China rose by nearly 240% from 2001 to 2008, which was higher than that of any other top 10 U.S. trading partner. During the first half of 2009, China has remained the third largest U.S. export market. The decline in U.S. exports to China (at -17.2%) was smaller than the decline in U.S. exports to every other top 10 U.S. export markets except France (at -7.8%), and was much smaller than the overall decrease in U.S. exports during this period (-24.6%). Table 3. Major U.S. Exports to China: 2008 ($ in millions and percent change) NAIC Number and Description $ millions Percent Change Waste and scrap 2,508 3,670 6,071 7,331 7, % 3344 Semiconductors and other electronic components 3,565 4,015 6,830 7,435 7, % 1111 Oilseeds and grains 2,829 2,339 2,593 4,145 7, % 3364 Aerospace products and parts 2,111 4,535 6,309 7,447 5, % 3252 Resin, synthetic rubber, and artificial & synthetic fibers & filament 1,631 2,127 2,548 3,290 3, % Source: USITC DataWeb Notes: North American Industry Classification system, 4-digit level. 3 The United States also exports a significant level of private services to China; these totaled $14.2 billion in Based on the North American industry Classification System, 4-digit level. 5 Some U.S. analysts have expressed concern over the composition of U.S. exports to China, noting that much of it consists of scrap products, components, and food, as opposed to high-value assembled manufactured products (such as cars). Chinese official complain that U.S. export controls on high tech trade has a significant negative impact on the composition and size of U.S. exports to China. Congressional Research Service 4

9 Table 4. U.S. Merchandise Exports to Major Trading Partners in 2001 and 2008 ($ in billions and % change) % Change from % Change from Canada Mexico China Japan Germany United Kingdom Netherlands South Korea Brazil France World , Source: USITC DataWeb. Ranked by top 10 U.S. export markets in Many trade analysts argue that China could prove to be a much more significant market for U.S. exports in the future. China is one of the world s fastest-growing economies, and rapid economic growth is likely to continue in the near future, provided that economic reforms are continued. China s goals of modernizing its infrastructure, upgrading its industries, and improving rural living standards could generate substantial demand for foreign goods and services. Finally, economic growth has substantially improved the purchasing power of Chinese citizens, especially those living in urban areas along the east coast of China. China s growing economy, large foreign exchange reserves (at over $2 trillion), and large population make it a potentially enormous market. To illustrate: China currently has the world s largest mobile phone network and one of the fastest-growing markets, with an estimated 679 million mobile phone users (as of April 2009), compared to 87 million users in Boeing Corporation predicts that China will be the largest market for commercial air travel outside the U.S. for the next 20 years ( ); during this period, China will buy 3,710 aircraft valued at $390 billion. 6 On April 11, 2006, Boeing announced it had signed a general purchase agreement with China for 80 Boeing 737s. On September 6, 2007, China announced it would buy 55 Boeing aircraft valued at $3.8 billion. It is estimated that China in 2008 replaced the United States as the world s largest Internet user: 253 million users versus 221 million respectively (as of June 6 Boeing, Current Market Outlook, , Congressional Research Service 5

10 2008). 7 Yet, the percentage of the Chinese population using the Internet is small relative to the United States: 19% versus 73%, respectively. The Chinese government projects that by the year 2020, there will be 140 million cars in China (seven times the current level), and that the number of cars sold annually will rise from 7.2 million units (2006) to 20.7 million units in According to some estimates, China is now the world s second largest market for new cars. General Motors (GM) and Ford reportedly sold 1.09 million and 306 thousand vehicles, respectively, in China in Major U.S. Imports from China China was the largest source of U.S. imports in 2008 at $338 billion, or 16.1% of total U.S. imports (up from 6.5% of total in 1996). U.S. imports from China rose by 5.1% in 2008 over the previous year (compared with an 11.7% rise in 2007). The importance (ranking) of China as a source of U.S. imports has risen dramatically, from eighth largest in 1990, to fourth in 2000, to second in , to first in The top five U.S. imports from China in 2008 were computers and parts, miscellaneous manufactured articles (such as toys, games, etc.), communications equipment, apparel, and audio and video equipment (see Table 5). During the first half of 2009, China has remained the largest source of U.S. imports. The decline in U.S. imports from China (at -13.4%) was the smallest percentage decline in U.S. imports among any of its top 10 import trading partners, and was significantly smaller than the overall decline in U.S. imports (at -32.2%). Table 5. Major U.S. Imports From China: 2008 ($ in millions and percent change) NAIC Number and Description Percent Change computer equipment 29,486 35,467 40,046 44,462 45, % 3399 Misc. manufactured commodities 23,712 26,449 28,888 34,827 35, % 3342 Communications equipment 9,015 14,121 17,977 23,192 26, % 3152 Apparel 10,530 16,362 19,228 22,955 22, % 3343 Audio and video equipment 12,421 15,287 18,789 19,075 19, % Source: USITC DataWeb Notes: North American Industry Classification system, 4-digit level. 7 New York Times, China Surpasses U.S. in Number of Internet Users, July 26, According to GM s website, it operates seven joint ventures and two wholly owned foreign enterprises and has more than 20,000 employees in China. Congressional Research Service 6

11 Throughout the 1980s and 1990s, nearly all of U.S. imports from China were low-value, laborintensive products such as toys and games, consumer electronic products, footwear, and textiles and apparel. However, over the past few years, an increasing proportion of U.S. imports from China has comprised of more technologically advanced products, such as computers. According to the U.S. Census Bureau, in 2008, U.S. imports of advanced technology products from China totaled $91.4 billion (27.1% of total U.S. imports from China), compared with $29.3 billion in 2003 (19.2% of total U.S. imports from China). In addition, imports of advanced technology products from China accounted for 27.5% of total U.S. imports of such products in 2008, compared with 14.1% in U.S. exports of advanced technology to China in 2008 were $18.7 billion; these accounted for 26.2% of total U.S. exports to China and 6.8% of total U.S. advanced technology exports. 9 Many analysts contend that the sharp increase in U.S. imports from China (and hence the growing trade deficit) is largely the result of movement in production facilities from other (primarily) Asian countries to China. 10 That is, various products that used to be made in Japan, Taiwan, Hong Kong, etc., and then exported to the United States are now being made in China (in many cases, by foreign firms in China) and exported to the United States. An illustration of this shift can be seen in Table 6, which lists U.S. imports of computer equipment and parts from For example, in 2000, Japan was the largest foreign supplier of U.S. computer equipment (with a 19.6% share of total shipments), while China ranked fourth (with a 12.1% share). In just eight years, Japan s ranking fell to fourth, the value of its shipments dropped by over half, and its share of U.S. computer imports declined to 7.7% (2008). China was by far the largest foreign supplier of computer equipment in 2008 with a 53.6% share of total U.S. imports. While U.S. imports of computer equipment from China rose by 452% over the past eight years, the total value of U.S. computer imports from the world rose by only 25%. Many analysts contend that a large share of the increase in Chinese computer production has come from foreign computer companies that have moved manufacturing facilities China. Table 6.Major Foreign Suppliers of U.S. Computer Equipment Imports: ($ in billions and % change) % change Total China Malaysia Japan Mexico Singapore Source: U.S. International Trade Commission Trade Data Web. Note: Ranked according to top five suppliers in Note, these figures do not indicate the level of sophistication of these products. Many U.S. imports of advanced technology products are parts. 10 Chinese data indicate that the share of China s exports produced by foreign-invested enterprises (FIEs) in China rose from 1.9% in 1986 to 55% in Congressional Research Service 7

12 China has become a major source of U.S. agricultural imports. It was the third largest supplier of such imports in 2008 (compared with 12 th largest in 2000), at $4.7 billion. U.S. agricultural imports from China rose by 42.2% in 2008 and by 104.5% from Major agricultural imports from China include seafood products, vegetables and fruit, and animal foods. Investment Ties Investment plays a major role in U.S.-China commercial ties. 11 China s investments in U.S. assets can be broken down into two categories: holdings of U.S. securities and foreign direct investment (FDI). The Treasury Department defines foreign holdings of U.S. securities as U.S. securities owned by foreign residents (including banks and other institutions) except where the owner has a direct investment relationship with the U.S. issuer of the securities. These include long-term (LT) U.S. Treasury securities, LT U.S. government agency securities, 12 LT corporate securities (some of which are asset-backed), equities (such as stocks), and short-term debt. 13 The U.S. Bureau of Economic Analysis (BEA) defines FDI (in the United States) as the ownership or control, directly or indirectly, by one foreign resident of 10 percent or more of the voting securities of an incorporated U.S. business enterprise or the equivalent interest in an unincorporated U.S. business enterprise. 14 BEA classifies FDI flows according to broad industrial sections, including mining; utilities; manufacturing (broken down into nine subsectors 15 ); wholesale trade; information; depository institutions; finance (excluding depository institutions); professional, scientific, and technical services; nonbank holding companies; and other industries. China s Holdings of U.S. Securities 16 The Treasury Department performs annual surveys of foreign holders of U.S. securities, the latest of which was released in February 2009 (preliminary data) for holding as of June China s total holdings of U.S. securities at the end of June 2008 were estimated at $1,205 billion, compared to $922 billion in June 2007 (an increase of 31%). From June 2002 to June 2008, China s holdings of U.S. securities as a share of total foreign holdings of U.S. securities rose from 3.9% to 11.7% and its ranking increased from fifth to second (after Japan at $1,250 billion). 11 U.S. data on FDI flows to and from China differ sharply from Chinese data on FDI flows to and from the United States. This section uses U.S. data. 12 Agency securities include both federal agencies and government-sponsored enterprises created by Congress (e.g., Fannie Mae and Freddie Mac) to provide credit to key sectors of the economy. Some of these securities are backed by assets (such as home mortgages). 13 LT securities are those with no stated maturity date (such as equities) or with an original term to maturity date of more than one year. Short-term debt includes U.S. Treasury securities, agency securities, and corporate securities with a maturity date of less than one year. 14 The 10% ownership share is the threshold considered to represent an effective voice or lasting influence in the management of an enterprise. See, BEA, International Economic Accounts, BEA Series Definitions, available at 15 These sectors include food; chemicals; primary and fabricated metals; machinery; computers and electronic products; electrical equipment, appliances and components; transportation equipment, and other manufacturing. 16 For additional information on this issue, see CRS Report RL34314, China s Holdings of U.S. Securities: Implications for the U.S. Economy, by Wayne M. Morrison and Marc Labonte 17 U.S. Treasury Department, Preliminary Report on Foreign Portfolio Holdings of U.S. Securities as of June 30, 2008, February 27, A final report expected in April Congressional Research Service 8

13 China likely became the largest holder in late 2008 or early 2009 (see Table 7). From June 2002 to June 2008, China s holdings of U. S. securities grew by nearly $1.1 trillion (or 566%), which was by far the largest increase in U.S. securities holdings of any other country. 18 These holding are largely the result of China s currency policy (discussed below). The largest type of U.S. securities held by China are U.S. Treasury securities, which are used to finance U.S. budget deficits; data for foreign holdings of these type of securities are reported on a monthly basis. China s holdings of U.S. Treasury securities rose from $118 billion (or 9.6% of total foreign holdings) at the end of 2002 to $727.4 billion (23.6% of foreign holdings) in December China s holdings as of July 2009 were $800.5 billion or 23.4% of total foreign holdings (see Table 8). 19 In September 2008, China become the largest foreign holder of U.S. Treasuries, and from January-July, it accounted for 17% of new purchases by foreign investors. Table 7. China s Holdings of U.S. Securities: June 2002-June 2008 ($ billions and percent change) % change , % Source: U.S. Department of Treasury. Notes: U.S. securities include short term and long-term debt, including Treasury securities, U.S. government agency securities, corporate securities, and equities. Table 8. China s Holdings of U.S. Treasury Securities: and July 2009 ($ billions and as a percent of total foreign holdings) July 2009 China s Holdings ($billions) Holdings As a Percent of Total Foreign Holdings % 10.4% 12.1% 15.2% 18.9% 20.3% 23.6% 23.4% Source: U.S. Treasury Department. Notes: Data based on periodical surveys by the Treasury Department, which often revises estimates for the previous year but not for all years and thus should be interpreted with caution. Annual data are year-end values Many U.S. policymakers have raised concern over China s large and growing holdings of U.S. securities, stating that while such purchases have helped the United States meet its investment needs and have helped fund the growing U.S. Federal budget deficit, they could give China increased leverage over the United States on major political and economic issues. On the other hand, Chinese officials have expressed concern over the safety of their large holdings of U.S. 18 U.S. Treasury Department, Report on Foreign Portfolio Holdings of U.S. Securities, various editions. Note, 2002 was the first year in which surveys listed data as of June. Prior to that, survey data were listed as of March or December. 19 U.S. Treasury Department, Major Foreign Holders of U.S. Treasury Securities, June 15, Note, the Treasury Department often revises its estimates of foreign holdings for a given year, but not for previous years. Thus comparisons of multi-year data should be interpreted with caution. Congressional Research Service 9

14 debt. Many analysts contend that China s economy is so dependent on a healthy and stable U.S. economy that China has no choice but to keep buying U.S. government debt. However, Chinese officials have expressed concern that growing U.S. government debt will spark inflation in the United States and a sharp depreciation of the dollar, which would diminish the value of China s dollar assets. 20 U.S. Holdings of Chinese Securities The Treasury Department also does surveys on U.S. holdings of Chinese securities; these data are on a year-end basis. The last survey (issued in October 2008) estimated total U.S. holdings of Chinese securities at $97.2 billion in 2007 (98% of which were in equities), up from $13.7 billion in U.S. holdings of Chinese securities in 2007 were equal to about 1.3% of total U.S. holdings of foreign securities. 21 Bilateral FDI Flows China s FDI in the United States is quite small relative to its holdings of U.S. securities: $1.2 billion (cumulative at the end of 2008) versus an estimated $1.4 trillion, respectively. 22 In 2008, China s ranked as the 30 th largest source of FDI in the United States. 23 Cumulative U.S. FDI in China in 2008 was $45.6 billion, roughly the size of U.S. FDI in Brazil and half that in Mexico. China was 17 th largest overall destination of U.S. FDI (up from 21 st in 2007). 24 Table 9. China s Cumulative FDI in the United States and U.S. FDI in China: ($ in millions and percent change) percent change (%) China s FDI in the U.S. U.S. FDI in China ,091 1, ,570 11,261 17,616 19,016 23,405 28,298 45, Source: U.S. Bureau of Economic Analysis. Notes: Data on a historical-cost basis. 20 See China View, U.S. stimulus-related debt could hurt investors, China warns, February 18, U.S. Treasury Department, Report on U.S. Portfolio Holdings of Foreign Securities as of December 31, 2007, October All BEA data is on a historical-cost, or book value, basis. 23 In comparison, total U.S. FDI in China in 2007 was $28.3 billion nearly 26 times China s FDI in the United States making China the 21 st largest U.S. destination for FDI. 24 Chinese FDI data on its FDI in the United States and U.S. FDI in China differ significantly from U.S. data. Congressional Research Service 10

15 Major U.S.-China Trade Issues Although China s economic reforms and rapid economic growth have expanded U.S.-China commercial relations in recent years, tensions have arisen over a wide variety of issues, China s mixed record on implementing its obligations in the WTO, including its failure to provide adequate protection of U.S. intellectual property rights (IPR); China s use of industrial policies to promote various domestic industries; the U.S. use of trade laws, such as safeguards, countervailing, and antidumping measures to respond to Chinese imports that are deemed harmful U.S. industries and workers; China s refusal to adopt a floating currency; and various problems relating to the health and safety of certain Chinese imports. Legislation has been introduced to respond to several of these issues (see U.S.-China Trade Legislation in the 111 th Congress ). China and the World Trade Organization Negotiations for China s accession to the General Agreement on Tariffs and Trade (GATT) and its successor organization, the WTO, began in 1986 and took over 15 years to complete. During the WTO negotiations, Chinese officials insisted that China was a developing country and should be allowed to enter under fairly lenient terms. The United States insisted that China could enter the WTO only if it substantially liberalized its trade regime. In the end, a compromise was reached that requires China to make immediate and extensive reductions in various trade and investment barriers, while allowing it to maintain some level of protection (or a transitional period of protection) for certain sensitive sectors. China s WTO membership was formally approved at the WTO Ministerial Conference in Doha, Qatar on November 10, Taiwan s WTO membership was approved the next day. On November 11, 2001, China notified the WTO that it had formally ratified the WTO agreements, and on December 11, 2001, it formally joined the WTO. Under the WTO accession agreement, China agreed to: Reduce the average tariff for industrial goods and agriculture products to 8.9% and 15%, respectively (with most cuts made by 2004 and all cuts completed by 2010). Limit subsidies for agricultural production to 8.5% of the value of farm output and eliminate export subsidies on agricultural exports. Within three years of accession, grant full trade and distribution rights to foreign enterprises (with some exceptions, such as for certain agricultural products, minerals, and fuels). Provide non-discriminatory treatment to all WTO members. Foreign firms in China will be treated no less favorably than Chinese firms for trade purposes. End discriminatory trade policies against foreign invested firms in China, such as domestic content rules and technology transfer requirements. Implement the WTO s Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement upon accession. (That agreement establishes basic standards on IPR protection and rules for enforcement.) Fully open the banking system to foreign financial institutions within five years (by the end of 2006). Joint ventures in insurance and telecommunication will be permitted (with various degrees of foreign ownership allowed). Congressional Research Service 11

16 WTO Implementation Issues China s record on implementing its WTO commitments has been mixed. China s average overall tariff has dropped from 15.6% in 2001 to 9.9% in 2009 (the tariff rate on industrial goods and agricultural products is 8.9 and 15.2, respectively) and a number of non-tariff measures have been eliminated. However, there have been several areas where China s implementation is considered to be incomplete. The USTR s seventh annual China WTO compliance report (issued in December 2008) identified several areas of concern, including failure by the Chinese government to maintain an effective IPR enforcement regime (discussed below), industrial policies and national standards that attempt to promote Chinese firms (while discriminating against foreign firms), restrictions on trading and distribution rights (especially in regards to IPR products, such as movies, books, and music), discriminatory and unpredictable health and safety rules on imports (especially agricultural products), burdensome regulations and restrictions on services (including excessive capital requirements), and failure to provide adequate transparency of trade laws and regulations. 25 The USTR s December 2008 China WTO report stated that China s failure to comply with key areas of its WTO commitments largely stemmed from its incomplete transition to a market based economy. A significant part of the economy, including the banking system and state owned enterprises (SOEs), are controlled by the central government remnants of the old command economy that existed before reforms began in Although China agreed to make SOEs operate according to free market principles when it joined the WTO, U.S. officials contend that SOEs are still being subsidized, especially through the banking system. In addition, China is attempting to promote the development of several industries (such as autos, steel, telecommunications, and high technology products) deemed by the government as important to China s future economic development and has implemented policies to promote and protect them. When China joined the WTO, it agreed to provide a full description of all its subsidy programs, but to date has failed to fully do so. In addition, China agreed to make its state-owned enterprises operate according to market principles; yet such firms continue to receive direction and subsidies. Some major issues of concern to the United States include the following. In November 2008, the government announced a $586 billion economic stimulus plan, which included policies that would be implemented to assist 10 pillar industries (including, autos, steel, shipbuilding, textiles, machinery, electronics and information, light industry, petrochemicals, non-ferrous metals, and logistics) to promote their long-term competitiveness. Government support policies for the 10 industries are expected to include tax cuts and incentives (including export tax rebates), industry subsidies and subsidies to consumers to purchase certain products (such as consumer goods and autos), fiscal support, directives to banks to provide financing, direct funds to support technology upgrades and the development of domestic brands, government procurement policies, the extension of export credits, and funding to help firms invest overseas. 26 Some analysts contend that these new subsidy programs could violate China s WTO 25 USTR, 2008 Report to Congress on China s WTO Compliance, December 23, On May 18, 2009, China s State Council, announced plans to create 3 million new jobs in light industry over the next three years by providing financial support to small and medium-sized light industry firms with good development potential. Congressional Research Service 12

17 commitments. In addition, in July 2009, the central government issued buy China regulations requiring that services, goods, and materials used for infrastructure projects funded by the stimulus plan come from Chinese sources (unless such products are not available locally). According to the New York Times, China has issued rules banning foreign participation in certain renewable energy technologies (such as wind power) or has imposed domestic content requirements for foreign firms. For example, the government requires that foreign solar power manufactures in China source 80% of their equipment purchases from Chinese suppliers. 27 In December 2006, the Chinese government designated seven industries (military equipment, power generation and distribution, oil, telecommunications, coal, civil aviation, and shipping) as critical to the nation s economic security and stated it must retain absolute control and limit foreign participation. 28 On June 30, 2006, China announced a partial opening of its beef market, which had been completely closed to U.S. imports in 2003, due to concerns over mad cow disease. However, U.S. officials have expressed disappointment that China has failed to develop a science-based trading protocol for importing beef from the United States, which would enable the United States to resume beef trade with China. 29 In July 2005, the Chinese government issued new guidelines on steel production, which reportedly include provisions for the preferential use of domestically produced steel-manufacturing equipment and domestic technologies; extensive government involvement in determining the number, size, location, and production quantities of steel producers in China; technology transfer requirements on foreign investment; and restrictions on foreign majority ownership. On June 14, 2006, Assistant U.S. Trade Representative for China Tim Stratford stated that China s steel guidelines were troubling, because it attempts to dictate industry outcomes and involves the government in making decisions that should be left to the marketplace. 30 The U.S. steel industry has expressed growing fears that Chinese government policies have led to overinvestment and overcapacity in China s domestic steel industry, which could lead it to flood world markets with cheap steel. 31 Such concerns led the USTR to begin a Steel Dialogue with China (which first met in March 2006) to discuss issues of concern to the U.S. steel industry. China s Automotive Industrial Policy, issued by the government in May 2004, includes provisions discouraging the importation of auto parts and encouraging the use of domestic technology, while requiring new automobile and automobile 27 New York Times, China Builds High Wall to Guard Energy Industry, July 13, China Daily, Nation Lists Sectors Critical to National Economy, December 19, In 2009, China imposed restrictions on pork imports from certain U.S. states because of concerns relating to the outbreak of influenza A(H1N1), or swine flu. 30 Statement of Timothy Stratford, Assistant U.S. Trade Representative for China Affairs, before the Congressional Steel Caucus, June 14, China is now the world s largest steel producer, accounting for 31% of the world s steel production. Its steel production levels rose by 25% over the previous year. According to U.S. officials, China s excess steel capacity in 2006 could be larger than total U.S. steel production. Congressional Research Service 13

18 engine plants to include substantial investment in research and development facilities. New auto parts regulations that went into effect in April 2005 discriminate against imported auto parts by assessing an additional charge on imported parts if they are incorporated into a vehicle that does not meet minimum levels of domestic content, discussed below. 32 To date, the United States has initiated eight WTO dispute resolution cases against China, six of which have been resolved or ruled upon. 33 China has filed three cases against the United States. These cases are summarized below. Pending U.S. Cases Against China On June 23, 2009, the United States and the EU filed a case against China s export restrictions (such as export quotas and taxes,) on raw materials (bauxite, coke, fluorspar, magnesium, manganese, silicon metal, silicon carbide, yellow phosphorus, and zinc). The United States charges that such policies are intended to lower prices for Chinese firms (steel, aluminum, and chemical sectors) in order to help them obtain an unfair competitive advantage. On December 19, 2008, the USTR filed a WTO case against China over its support for Famous Chinese brand programs, charging that such programs utilize various export subsidies (including cash grant rewards, preferential loans, research and development funding to develop new products, and payments to lower the cost of export credit insurance) at the central and local government level to promote the recognition and sale of Chinese brand products overseas. Resolved Cases or a WTO Panel Ruling Has Issued a Ruling On March 3, 2008, the USTR requested WTO dispute resolution consultations with China regarding its discriminatory treatment of U.S. suppliers of financial information services in China. On November 13, 2008, the USTR announced that China had agreed to eliminate discriminatory restrictions on how U.S. and other foreign suppliers of financial information services do business in China. On April 10, 2007, the USTR filed two IPR-related cases against China: the first case charges that China has failed to comply with the TRIPS agreement (namely in terms of its enforcement of IPR laws) and the second case charges that China has failed to provide sufficient market access to IPR-related products, namely in terms of trading rights and distribution services. On January 26, 2009, the WTO ruled that many of China s IPR enforcement policies failed to WTO obligations and on August 12, 2009 it ruled that many of China s regulations on trading rights and distribution were WTO inconsistent (see Violations of U.S. Intellectual Property Rights ). On February 5, 2007, the USTR announced it had requested WTO dispute consultations with China over government regulations that give illegal (WTO- 32 This provision was found by the WTO to be inconsistent with WTO rules. See list of WTO cases brought by the United States against China. 33 For an overview of the WTO dispute resolution process, see CRS Report RS20088, Dispute Settlement in the World Trade Organization (WTO): An Overview, by Jeanne J. Grimmett. Congressional Research Service 14

19 inconsistent) import and export subsidies to various industries in China (such as steel, wood, and paper) that distort trade and discriminate against imports. 34 China s WTO accession agreement required it to immediately eliminate such subsidies. On November 29, 2007, China formally agreed to eliminate the subsidies in question by January 1, On March 30, 2006, the USTR initiated a WTO case against China for its use of discriminatory regulations applied to imported auto parts (which often applies the high tariff rate on finished autos to certain auto parts), stating that the purpose of these rules was to discourage domestic producers from using imported parts and encouraging foreign firms to move production to China. On February 13, 2008, a WTO panel ruled that China s discriminatory tariff policy was inconsistent with its WTO obligations (stating that the auto tariffs constituted an internal charge rather than ordinary customs duties, which violated WTO rules on national treatment). China appealed the decision, but a WTO Appellate Body largely upheld the WTO panels decision. On March 30, 2006, the USTR initiated a WTO case against China for its use of discriminatory regulations applied to imported auto parts (which often applies the high tariff rate on finished autos to certain auto parts), stating that the purpose of these rules was to discourage domestic producers from using imported parts and encouraging foreign firms to move production to China. On February 13, 2008, a WTO panel ruled that China s discriminatory tariff policy was inconsistent with its WTO obligations (stating that the auto tariffs constituted an internal charge rather than ordinary customs duties, which violated WTO rules on national treatment). China appealed the decision, but a WTO Appellate Body largely upheld the WTO panels decision. On March 18, 2004, the USTR announced it had filed a WTO dispute resolution case against China over its discriminatory tax treatment of imported semiconductors. The United States claimed that China applied a 17% VAT rate on semiconductor chips that were designed and made outside China, but gave VAT rebates to domestic producers. Following consultations with the Chinese government, the USTR announced on July 8, 2004, that China agreed to end its preferential tax policy by April However, the USTR has expressed concern over new forms of financial assistance given by the Chinese government to its domestic semiconductor industry. Chinese WTO Cases Against the United States On September 14, 2009, China brought a WTO case against the United States because of its imposition of additional duties on Chinese tires that resulted from a China-specific safeguard investigation (see discussion of this case, below). On April 17, 2009, China brought a WTO case against the United States over a provision in the Omnibus Appropriations Act of 2009 that effectively prohibits the establishment or implementation of any measures that would allow poultry 34 Some programs give tax preferences, tariff exemptions, discounted loans, or other benefits to firms that meet certain export performance requirements, while others give tax breaks for purchasing Chinese-made equipment and accessories over imports. Congressional Research Service 15

20 products to be imported from China. (Congress is currently consideration legislation to make this provision consistent with WTO rules; see U.S.-China Trade Legislation in the 111 th Congress. ) On 14 September 2007, China initiated a case against the United States regarding its use of anti-dumping and countervailing duty determinations on free sheet paper from China. On September 19, 2008, China initiated a WTO case against the United States in regards to its use of antidumping and countervailing measures against certain Chinese-made steel pipes, tires, and laminated woven sacks. Violations of U.S. Intellectual Property Rights The United States has pressed China to improve its IPR protection regime since the late 1980s. In 1991, the United States (under a Section 301 case) threatened to impose $1.5 billion in trade sanctions against China if it failed to strengthen its IPR laws. Although China later implemented a number of new IPR laws, it often failed to enforce them, which led the United States to once again threaten China with trade sanctions. The two sides reached a trade agreement in 1995, which pledged China to take immediate steps to stem IPR piracy by cracking down on large-scale producers and distributors of pirated materials and prohibiting the export of pirated products, establishing mechanisms to ensure long-term enforcement of IPR laws and providing greater market access to U.S. IPR-related products. Under the terms of its accession to the World Trade Organization (WTO) in 2001, China agreed to immediately bring its IPR laws in compliance with the WTO s Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement, which include a commitment to establish an effective IPR enforcement regime. The U.S. Trade Representative s (USTR) office has stated on a number of occasions that China has made great strides in improving its IPR protection regime, noting that it has passed several new IPR-related laws, closed or fined several assembly operations for illegal production lines, seized millions of illegal audio-visual products, curtailed exports of pirated products, expanded training of judges and law enforcement officials on IPR protection, and expanded legitimate licensing of film and music production in China. However, the USTR has indicated that much work needs to be done to improve China s IPR protection regime, especially in terms of deterrence. Many business groups contend that poor IPR protection is one of the most significant obstacles for doing business in China. To illustrate: According to IPR industry groups, China has some of the highest piracy rates in the world: 95% for entertainment software, 90% for records and music, and 82% for business software. Piracy in China for business and entertainment software alone is estimated to cost U.S. firms $3.5 billion in lost trade in 2008, which were was than losses from any other foreign country Estimates made by the International Intellectual Property Rights Alliance.. Congressional Research Service 16